$25 billion gas pipeline hinges on Alaska oil tax

Five smiling men in suits stand in a semicircle, their arms extended as though they were about to perform a cheer.

The description says the picture captures the "historic agreement" between Gov. Frank Murkowski and Alaska's three largest oil producers on Feb. 21 to develop a $25 billion North Slope natural-gas pipeline that would run through Canada to Midwestern markets.

Nearly two months later, the deal is still under wraps and nobody has signed anything.

The governor and the producers say the pipeline project could still be tripped up if the Legislature passes the changes being made to the proposed production tax that was negotiated between the governor and the three companies.

Changing the state's production tax is a condition set by BP PLC, ConocoPhillips and Exxon Mobil Corp., who say they need long-term tax stability to invest the amount of cash needed to build the pipeline.

The governor expects the Legislature to pass his bill unchanged and then lock in the new tax rate for 30 years.

If lawmakers change his tax or fail to lock it in for multiple years, they risk the pipeline, the governor says.

The oil industry has been waging an in-state television and print advertising campaign warning that the higher tax rates lawmakers are considering could have dire consequences for future industry investment.

Many legislators and their consultants dispute that. The amount they are considering raising the tax wouldn't be enough of a disincentive by itself to tank the pipeline, they say.

Even to legislators within the Republican governor's own party, pushing lawmakers to pass his tax bill unchanged seems to be too much for Murkowski to ask.

"The governor suggested that it's not OK to tinker. I would respectfully suggest to the governor that it's my job to tinker, and I can tinker all I want until I think the shareholders that I represent are satisfied and I can defend my position," said Senate Finance Co-Chairman Gary Wilken, R-Fairbanks.

The gas pipeline is touted as Alaska's next Prudhoe Bay, the mammoth field that is in decline but still provided about 9 percent of the nation's supply until last month, when a pipeline leak reduced its normal production.

The gas pipeline would be the largest construction project in the nation's history and would extend by decades the life of Alaska's flagging oil and gas production.

There are 35 trillion cubic feet of proven natural-gas reserves in Alaska's North Slope, which the state for decades has been trying to develop and sell. Only in recent years, since natural-gas prices have skyrocketed, has the expensive gas pipeline been a realistic project for the three energy companies.

Talks between the companies and the governor's negotiating team have gone on for well over a year. The resulting gas contract, which sets tax and royalty terms to recover Alaska's natural gas, was negotiated in secret under the state Stranded Gas Development Act's confidentiality clause. The act set into law how the state can negotiate with private companies the recovery of its North Slope natural-gas reserves.

Even though the contract is finished, Murkowski continues to keep it out of the public eye. The new production tax has to be passed first, the governor says, then it can be incorporated into the contract.

After that, the contract will be released to the public and for ratification by the Legislature, and a key precursor to building the gas pipeline will have been met.

But some legislators are calling for the contract's release now. They want to see it side-by-side with the oil tax, and how one would affect the other.

The governor has refused requests by lawmakers and news organizations, including The Associated Press, to release the contract.

Jim Clark, Murkowski's chief of staff and his lead pipeline negotiator, said the tax bill has to be passed and inserted into the contract before it can be released.

"I think that you start carving the thing up and you start presenting it piecemeal, it becomes very hard for people to then remember how the pieces fit together and see how it works," Clark said. "There may have been a more elegant way to deal with the chicken-and-egg problem. I haven't figured it out."

But skeptics say Murkowski has tried to use the confidential contract as a cudgel against lawmakers to get them to pass his version of the tax bill, which would tax companies based on their net profits instead of on their production.

The governor's 20 percent tax is more favorable to the oil industry than the changes made in legislative committees. House and Senate versions added escalated tax rates when oil prices reach certain levels and trimmed some of the industry tax incentives Murkowski had proposed.

The changes have drawn warnings from the governor and industry. The message from the Murkowski administration has been for lawmakers to keep their eyes on the prize. Higher industry taxes mean nothing if the oil companies walk away from further development, Clark said.

"We think the gas line is the absolute jewel in the crown," Clark said. "I hope everybody here realizes that in terms of the realized gas, 35 trillion cubic feet represents (the equivalent of) 10 billion barrels of oil. That is our Prudhoe Bay, our next Prudhoe Bay."

Lawmakers say they want to see the contract for themselves before they'll believe higher taxes will kill a pipeline deal.

"I simply can't trust them. I have to see the gas line (contract) to know if that's true," said Sen. Hollis French, D-Anchorage. "It's the biggest decision I'll make in this building, and to make it with half of the equation hidden, it seems to me I'm not fulfilling my job expectations."

The bigger issue may be the 30-year lock on the tax rate. The state Constitution forbids the Legislature to give away its taxing authority, and whether this provision runs counter to that clause is something that may ultimately be decided in court.